Price Discovery in the U.S. Treasury Market: The Impact of Orderflow and Liquidity on the Yield Curve

ABSTRACT

We examine the role of price discovery in the U.S. Treasury market through the empirical relationship between orderflow, liquidity,
and the yield curve. We find that orderflow imbalances (excess buying or selling pressure) account for up to 26% of the day‐to‐day
variation in yields on days without major macroeconomic announcements. The effect of orderflow on yields is permanent and
strongest when liquidity is low. All of the evidence points toward an important role of price discovery in understanding the
behavior of the yield curve.